iSPIRT works to transform India into a hub for new generation software products, by addressing crucial government policy, creating market catalysts and grow the maturity of product entrepreneurs. Welcome to the Official Blog!

An Indian software company serving majorly clients in the US or Europe is not an unusual thing anymore. However, if anybody were to guess the location of the India office, a company that counts amongst its clients about 100,000 small businesses globally, they would most probably chose Bangalore or Hyderabad. However, Appointy, which is an advanced web-based scheduling software tool and has around 90,000 salons, spas, and dance and yoga classes as its clients in 100 countries does it out of Bhopal. Similarly Kayako, which sells support software to over 30,000 clients including NASA, Peugeot, Sega found its roots in Jalandhar, which as per their own website is “one of the least likely places to establish a technology start-up”.

The emergence of these companies from relatively smaller towns, highlight India’s comparative advantage in terms of ability to build high quality companies in the domain of Software as a Service (SaaS). The inherent model of the SaaS business does not require proximity to the end user. In the simplest terms, it is a software that can be accessed through a web browser, by paying a subscription, either on a monthly or yearly basis. The software is hosted exclusively by the provider, as opposed to being downloaded upon purchase and subsequently hosted by the client. The customer gains by spending less upfront, not having to maintain hardware and not worrying about upgrades & data security. Driven by such factors, the SaaS model is growing exponentially and the global market for 2015 stood at USD 31 billion (NASSCOM). The growth is expected to continue at CAGR of 18% to reach a market size of USD 72 billion by 2020. Another study by Google and Accel Partners estimates the 2020 market to be USD 132 billion.

The Indian SaaS landscape is expected to evolve even faster. The FY16 market is estimated to be USD 407 million, a 34% growth over FY15. This figure is expected to triple by 2020 growing at a CAGR of 27%, 1.5 times the global growth rate. It is easy to see why India is going to be a hotbed of activity for SaaS companies. The cost of product developers is one of the biggest items in a SaaS company’s P&L Statement. A software developer in India costs 25% of what a similarly skilled one based in the US would cost. India has an estimated 36,000 product managers, 25,000 SaaS engineers and 100,000 other engineers with the skills for building a SaaS product. Another critical factor is the adoption of mobiles as the primary device for accessing data. India being a mobile-first nation is well placed to ride this shift as its young companies are more flexible and can focus on mobile platforms.

Buoyed by these advantages, companies have been sprouting in every segment of the sector. NASSCOM estimates that there are around 150 Indian companies offering SaaS solutions. 40% of these companies have been incorporated after 2010. Customer Relationship Management (CRM), Content Collaboration and Communication (CCC) and Enterprise Resource Planning are the hottest segments accounting for more than half the market in FY16.

Growth in the domestic market is also expected to be a major boost factor for the Indian companies. A deeper dive into the key underlying sectors which are adopting SaaS brings even more attractive prospects to the fore. Healthcare, E-commerce, BFSI and education sectors have been the most targeted segments by emerging SaaS companies. Each of these sectors is expected to expand at a healthy pace in the near future riding on the overall economy’s consumption led growth. At 7.6%, India’s GDP growth rate for FY16 has been the highest in the last 5 years. Small and Medium sized businesses emerging in these sectors would be much more nimble and receptive of SaaS solutions to avoid upfront large capex on technology.

The investor community, financial and strategic, has also embraced the SaaS opportunity with both hands. A total of USD 650 million was invested in SaaS companies in India till 2014. The funding in 2014 is estimated to be between USD 170 million to USD 200 million. However, the funding skyrocketed in 2015 with USD 450 million in the first half of the year itself. Some of the most active investors who are backing SaaS companies India are as below.

The investors will have their hands full the short to medium term as most of the companies move traverse from Series A to B to C and so on. With companies maturing and cash balances building up, the sector is also expected start throwing up M&A opportunities much faster than any other sector.

The SaaS story hasn’t quite meant curtains for the traditional software licensing business model yet. Currently, SaaS commands only about 9% of the over Indian software market which is estimated to be USD 3.1 billion. However, Indian SaaS companies have already been able to create a market perception of building great products at lower cost. Currently, a large number of Indian SaaS companies would lie in the revenue range of USD 1 to 2 million. However, there are enough cases of rapid scaling up companies (such as Freshdesk, Capillary Technologies and CRMNext) to help us believe that we will soon see companies with multiple billion dollars in revenue emerging from India.

An important policy agenda for iSPIRT is to reverse the exodus of technology startups. About 75% of the funded technology startups are redomiciling outside India due to regulatory irritants.

iSPIRT has a Policy Expert Team – called Stay-and-List-in-India – working only on this area since December 2014. This is the policy team that worked closely with SEBI on the “startup bourse” that was notified earlier this year. Mr. Mohandas Pai has been an important guide and mentor to this team.

The Stay-and-List-in-India Policy Expert Team has developed a Stay-in-India checklist. This has 36 items that need to be addressed by Ministry of Finance, Ministry of Corporate Affairs, RBI and DIPP.

After PM Modi’s Silicon Valley visit, Mr. Amitabh Kant, Secretary DIPP, has been pushing hard to make progress on the Stay-in-India checklist. Towards this end, he had organized a cross-ministerial meeting with iSPIRT that was chaired by Mr. Nripendra Misra, Principal Secretary – PMO. The meeting was attended by Secretaries including Mr Madhav Lal, Ministry of Micro, Small and Medium Enterprises; Mr Ashok Lavasa, Ministry of Environment, Forest and Climate Change; Dr. Hasmukh Adhia, Department of Revenue, Mr Shaktikanta Das Department of Economic Affairs, both from Ministry of Finance; Mr. Tapan Ray, Ministry of Corporate Affairs; Mr Ashutosh Sharma, Department of Science & Technology and Mr Krishnaswamy Vijayraghavan, Department of Biotechnology both from Ministry of Science & Technology.

There were three parts in the meeting. The first part was a showcase of 6 technology startups. This was curated, as usual, by Shekhar Kirani, Fellow, iSPIRT (Accel Partners) and Avinash Raghava. The purpose of this session was to highlight that tech startups are key to transforming India at large. They are setup by entrepreneurs from middle class backgrounds who parley their skills into sweat equity to build valuable businesses. The showcased companies included CRMNext, Foradian Technologies, Eko India Financial Services,Snapdeal, Uniken, ForusHealth and Team Indus. They all made carefully prepared 3 min presentations and answered questions.

The Stay-in-India Checklist was discussed in the second part of the meeting. Sanjay Khan (Khaitan Associates) of the Policy Expert Team made the presentation. This was a technical discussion on specific issues. At times, it was very detailed.

In particular, Mr. Shaktikanta Das, Secretary, Department of Economic Affairs, Ministry of Finance and Mr. Amitabh Kant, Secretary, Department of Industrial Policy and Promotion (DIPP) were very proactive in taking suggestions. Mr. Kant did say that they are trying to create a single window to deal with startups.

In the third part of the meeting, there was short discussion about teaching entrepreneurship as a minor in engineering education. This was led by Sanjay Vijaykumar of Startup Village. His talk was very passionate and impactful.

It was cleart that all the officials were determined to make quick progress and were truly concerned by the exodus of tech startups from India. We all ended the meeting with a group photo. One of the senior officials remarked that this moment is important to capture so that we can look back and remember where it all started!

The weather in Chennai was finally getting kinder & more pleasant in tune with the time of the year, much like the funding climate which has been less testing on the entrepreneur in general. Depending on whether you ask a consumer product entrepreneur or a B2B SaaS product entrepreneur, the level of optimism could vary, but it’s optimism all around.

As a pre-event runup to SaaSx2, we met at Freshdesk’s office in Chennai, for the Roundtable on “What it takes to fund a SaaS company?”.

Shekhar Kirani from Accel and Karthik Reddy from Blume, joined by Girish Mathrubootham from Freshdesk, anchored the conversations.

Shekhar and Karthik started the round table, with some pretty interesting nuances about what numbers ought to add up, for their investment to make the returns they promised to their limited partners. The conversation touched upon what it takes to get funded at the early stages (upto Series A) and what it takes to be on that path, beyond Series A. Girish chipped in with personal examples of how Freshdesk got funded and his first-hand insight into looking at early stage startups that get funded (or not)!

Here are some bite-sized insights from the conversation that lasted for 3 hours:

On the options for the entrepreneur

Indian B2B entrepreneurs have bootstrapped their startups remarkably well that it’s not an exception. If you are a B2B entrepreneur bootstrap or do more with less. Wait for the right strategic opportunity to scale. With numbers backing you up, raise for growth.

On what drives investors’ decisions

Don’t get discouraged with ‘No’ from a partner of a VC firm. They have their biases and baggages. It’s the partner who has a view and not the firm. Find your champion.

Most investors don’t like it if the outcome has a cap to it — there’s a maximum that you can do in the market and that sets a pretty hard ceiling to crack. In such cases, you’ve to out-execute everyone else and that’s a hard ploy and makes less exciting for the investor. Example: Would you start another CRM company now and if so why would you do what the rest of the 1600 have not done. Even if you execute well, what market share can you capture?

VC firms pitch to Limited Partners (wealthy individuals, family offices, pension funds etc.) more than startups do to investors. They’ve the same issue of having to convince an LP that a certain startup that’s pre-revenue will get an exit worth $100M in 7 years. To do that in India, when there was no such exit till recently, made it even less credible.

Most funds last for 10 years. 3 years to invest and 7 years to grow and nurture those investments towards exit events.

Among the top quartile or decile of startups in a portfolio, one company returns the entire fund. Top 5 companies return 90% of the capital.

Each startup has to be a prospect for a $500M exit, for the fund to meet its “Return on Capital Employed” goals.

On what investors look for in a startup?

In a SaaS startup, front loaded costs are high. So your first two rounds are not about revenue or profitability but more about Product-Market fit and elimination of business model risks.

Integrity, smartness and hard working ethics of the team are important but not sufficient. There has to be a potential for $500M exit for that startup for investors’ math to work. Anything less is already a sub-par outcome.

It’s the job of the entrepreneur to make the VC look and realize how big the market is. They see a 1000 pitches a month and carry stereotypes. Help them make the context switch.

Integrity cannot be stressed enough — Questions about India’s professional ethics do come up.). Indian LPs too find it hard to fathom that it’s possible to legally generate a 25x outcome from a startup, given where they come from and what they’ve seen.

On how to negotiate investment terms

Clauses are there to protect the downsides for an investor. If you understand why they are there it’s easy to have a conversation around them.

Most dissonance that an entrepreneur feels is because s/he does not understand the responsibilities the investor has to his/her fund and their LPs.

Clauses such as liquidation preferences are there to protect the downside of the investments. So long as you cover the down-sides as an entrepreneur, your negotiation leverage for not carrying over these clauses to subsequent rounds is high — Don’t get it yet? Ask entrepreneurs who’ve raised several rounds, on how to negotiate.

Drag along clause is there so that an investor can get the fund its returns as the fund comes to the end of life. If that goal conflicts with your startup’s, look for funds that are early in their life, to take money from and thereby give yourself a better runway.

Everything is negotiable if your numbers are good. All downside protections kick in only during the bad times. So the best way to stay on top of the negotiations is to execute well.

I have been interacting with various startup teams over the last several years, predominantly around ideation, product-market fit, funding, scaling, and strategy aspects of the companies. Before I was an investor, I spent a lot of time around product creation with two successful startups in the Silicon Valley and managing business in a large Internet company. In recent times, I have been spending a lot of time on the board of several Indian companies who are starting to scale. Over many years of this engagement with startups, I have come to believe in few things, and one of it is what I call “Rules of the Game”. The sporting analogy is deliberate, as I use it throughout this article.

The Rules of the Game

In India, most of the founders get into their entrepreneurial journey with very little preparation and knowledge. In fact, it looks like most of them jump in based on how their friends have done or the founders in the company they work have done. Some of the serial entrepreneurs are starting to plunge in their second attempt, much more prepared and know a lot more about how the game of entrepreneurship is played. However, most of the entrepreneurs haven’t thought through the rules of this game, especially, the difference between a win, a draw and a loss in the game of entrepreneurship.

What is a win, draw and a loss?

Most of the entrepreneurs start their journey with an intention to solve a problem that they have identified is important and useful. If one has setup a small company with a tiny team, has solved the problem well and has great number of customers, and customers are paying, the game is already looking interesting for you. If you are making profits, and you are paying yourself a market salary, and you are self sufficient with enough room to grow, make no mistake about it, you are winning the game.

If you have raised money, built a great team, an outstanding product, a defensible growing business and you know how to take the company to profitability, and you are geared towards an exit or have already done, you are a role model. This is definitely a BIG win.

On the other hand, you invested time and effort in building the product out, you made attempts to find product-market fit, you learnt how to market, sell, and support customers, hired few good team players, and overall you have done every thing possible. However, you come to know that the business model is not viable and you cannot service customers within the budget. After all fixes to business model, if things don’t change you may decide to shut down and look for your next gig. From my point of view this is definitely a “draw”. It is draw because in the process, you have learnt a lot of things around entrepreneurship; the rules of the game and you come out very strong in your next gig.

A loss is when you are caught in a rut. You have built some sort of a solution, you have few customers, but they are not very happy. You are not able to scale the company as the product-market fit is not yet accomplished and at the same time you have just enough revenues to pay your bills and manage your employees. You know at the bottom of your heart that you can continue the way it is for several years, but you don’t see a big change. This is a classic “loss”.

I’ve always believed that the loss is where you don’t want to be, because of the uncertainty about which direction you need to take. Conversely, a draw can be bounced back from. Everything you’ve learnt and gone through is invaluable. You’ll be a far better entrepreneur the next time around.

But is there a better way to learn, to get the experience of the win, draw, loss without actually playing the game? That would be brilliant, wouldn’t it?

Ideation vs. Execution

Of course there is a better way to learn. In fact, there are reams of startup literature out there; the best of them are free, actually, and your first step should be to read them and read up on your domain as much as you can. In fact, I have even counseled people to do nothing except read for a month before getting into the game. Read interviews of very successful entrepreneurs and grasp around “why” they were successful. What was the context under which these folks operated and how they tuned their operations to be successful against others is a great learning. This knowledge is out there. You just need to take it and apply to your world.

However, most of the time, reading and understanding isn’t going to be enough. Reading about it and executing it are two completely different things. This is where the value of the ecosystem and mentoring becomes very useful. A mentor can take all that knowledge you have imbibed and help you translate it into meaningful, decisive actions in your context. And again, the quality of such mentors matter. A mentor who makes a business out of ‘guiding’ startups is not a mentor. An excellent mentor is very articulate, keen observer, and some one who has gone through their own iterations of their idea, started a company, learnt every thing possible about their customers, and eventually was able to scale the company. Your best bet is to find such mentors and interacting with them is of significant help.

In a fledgling software product ecosystem like ours, finding enough successful mentors to support many of our startups is very tough. This is where, I see the value of efforts like the inaugural #PNCamp. Throwing in just-started practitioners with experienced practitioners and having them help each other is in my view, the best thing that can be done to push the ecosystem to accelerate faster. I am hoping that many other such practitioner lead hangouts happen in the country to boost our eco-system to next orbit.

Looking at the agenda and participants of #PNCamp, it looks like there will be an incredible amount of exchange of practical knowledge among attendees and also bit customized as each session being small (around 20 folks).

If you want to see an example of practitioner-lead-mentor, see the movie “Miracle” based on the real-story of US Olympic ice-hockey team winning against the invincible Russian team. The credit of the win goes to the player who turned coach; Herb Brooks who guides and empowers the team for a win that no one thought was possible.

All the best for the #PNCamp and thanks to Sairam for putting this together.